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Supreme Court: Let Lawsuit over Colorado’s Internet Tax Law Proceed

  • Mar 3, 2015 | Gail Cole

 Supreme Court weighs in on remote sales tax.

Colorado residents owe use tax when they purchase taxable goods for use or storage in Colorado without paying nexus with the state (Amazon.com leaps to mind). In Colorado as in other states, use tax compliance is extremely difficult to enforce among individual taxpayers.

Federal lawmakers have tried and failed to pass the Marketplace Fairness Act, legislation that would permit states that simplify sales tax to tax remote vendors. This is something currently prohibited at the federal level unless a business has a physical presence in a state.

To work around the physical presence requirement, numerous states have instituted click-through or affiliate nexus laws—often called Amazon tax laws in honor of the world’s largest remote retailer. Under these laws, businesses that derive a certain amount of sales through in-state businesses, as through a link on a local business’ website, must collect and remit sales tax.

Colorado took another route, instituting use tax reporting requirements in 2010 in order to enhance use tax compliance among residents. It requires remote vendors that don’t collect sales tax and that make at least $100,000 in total gross sales in a calendar year to “give notice to all Colorado purchasers that Colorado sales or use tax is due on all purchases that are not exempt from sales tax.” In addition, the businesses must provide an annual report to the Colorado Department of Revenue.

The use tax reporting requirements were challenged by the Direct Marketing Association, which represents internet sellers. The suit made its way through Colorado court system and all the way to the United States Supreme Court, which was asked to determine if the Tax Injunction Act “deprived the District Court of jurisdiction over the suit.”

The Supreme Court has now issued its opinion (Direct Marketing Association v. Brohl). It determined that the “relief sought by petitioner would not ‘enjoin, suspend or restrain the assessment, levy or collection’ of Colorado’s sales and use taxes....” In addition:

“Because the TIA does not bar petitioner’s suit, we reverse the judgment of the Court of Appeals. Like the Court of Appeals, we express no view on the merits of those claims and remand the case for further proceedings consistent with this opinion.”

Moving forward

It is impossible to say what the future will bring. That said, in concurring, Justice Kennedy wrote the following:

“It does seem appropriate, and indeed necessary, to add this separate statement concerning what may well be a serious continuing injustice faced by Colorado and many other States….”

“Almost half a century ago, this Court determined that, under its Commerce Clause jurisprudence, States cannot require a business to collect use taxes—which are the equivalent of sales taxes for out-of-state purchases—if the business does not have a physical presence in the State. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967).”

“There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently “substantial nexus” to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet….”

“When the Court decided Quill, mail-order sales in the United States totaled $180 billion. … By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States.”

“Because of Quill and Bellas Hess, States have been unable to collect many of the taxes due on these purchases.”

“Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. … It should be left in place only if a powerful showing can be made that its rationale is still correct.”

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.